Overcoming Doubts - Debunking Common Misconceptions & Real-World Use Cases

Misconceptions

Introduction to Bitcoin & Stablecoin

Misconceptions

Stablecoin Misconceptions

Bitcoin has been surrounded by pushback, criticism and misconceptions since its birth in 2009. Despite its growth in popularity and adoption, many still consider it a bubble waiting to burst. Along these same lines, stablecoins have attracted similar attention and scepticism. The idea of a currency backed by a stable asset sounds promising, but many people misunderstand how stablecoins work and their potential impact on the financial system.

In this section, we will explore some of the most common misconceptions surrounding Bitcoin and stablecoins. We will delve into the truth behind these misconceptions and debunk the ones that have caused the most confusion and scepticism. From the belief that bitcoin is too volatile to be a viable currency to concerns about its energy usage, we will examine each issue so that you can form your own opinion. By the end of this chapter, you will have a much greater understanding of these technologies and whether there is legitimacy behind these pushbacks. Bitcoin Misconceptions Although numerous misconceptions surround Bitcoin, let's touch on the nine most prominent:

Bitcoin is a bubble waiting to burst
Bitcoin is too volatile to be of any value
Bitcoin is worthless as it is not backed by anything
Bitcoin’s technology is already obsolete
Bitcoin is too slow and expensive to be an effective medium of exchange
Bitcoin is mainly used for illegal activity
Anyone can duplicate the Bitcoin code, making it worthless
Bitcoin consumes too much energy

Let's dive in…

Misconception One: Bitcoin is a bubble waiting to burst Since its inception, Bitcoin has been pronounced dead in mainstream media 473 times (As of March 2023), yet it continues to function flawlessly.

This begs the question: What about Bitcoin gives people the impression that it is a bubble waiting to burst? Throughout history, when something has experienced a monumental rise in price, it also tends to see a catastrophic collapse, as this price is unsustainable and often fueled by speculation and greed. So, what makes Bitcoin different?

First, bitcoin has a limited supply of 21 million coins, which means that, unlike traditional fiat currencies, it cannot be devalued by monetary expansion. This scarcity, combined with the increasing global adoption of Bitcoin, has led to a steady but volatile increase in its value over time. This is unlike any other asset, whereby as prices rise, so does supply. This means supply will overwhelm demand at some point, and prices will have to collapse.

Second, built into Bitcoin's code is a feature called the halving. Approximately every four years, this event slashes the mining reward by half, impacting miners' nominal revenue. Unless the price of bitcoin doubles, miners experience a substantial decrease in their earnings. This aspect has led to Bitcoin being characterised as "number go up" technology, as this feature exerts upward pressure on the price every four years to ensure miners receive adequate compensation for securing the blockchain. Consequently, we witness these volatile price fluctuations approximately every four years.

Side Note: If you've studied finance, you may have heard of the "efficient market theorem," built around the idea that markets are perfectly efficient due to rational behaviour. It, therefore, posits that asset prices in financial markets reflect all available information, making it impossible to consistently achieve above-average returns by analysing historical data or other market information.

However, this theory forgets that markets are composed of individuals, and human nature is inherently irrational and influenced by emotions. This irrationality leads to biases, herd behaviour, and cognitive errors, causing prices to deviate from their true value. For example, in the context of Bitcoin's halving events, rational markets should anticipate and reflect future reduced supply in bitcoin's present-day price. However, the periodic price surges highlight that participants have not accounted for such information. This irrationality has proven to provide significant financial rewards to patient long-term holders.

Third, Bitcoin has the potential to revolutionise global exchange. For the first time in history, we have a method of transacting in a trustless, permissionless and decentralised manner. As discussed earlier in this course, this is unparalleled and offers immense benefits to both developed and developing countries alike.

Lastly, bitcoin's total market value is sitting just shy of $550 billion US dollars. This may seem like an astronomical amount until you realise that gold, depending on one's calculation, is anywhere from $10 trillion to $20 trillion. That means that although Bitcoin offers many of the same benefits as gold, it trades at 1/40th of the value. And when we look at other assets, that divergence is even larger.

Global stock market: $124.4 trillion
Global fixed income/bond market: $126.9 trillion
Global real estate market: $326.5 trillion
Global derivatives market: Estimated at over $1 quadrillion

All in all, when people call bitcoin a bubble, either:

They have not done the research to understand its numerous benefits and use cases.
Or they misunderstand the functionality of Bitcoin and the total amount of value stored in the above assets from which Bitcoin has the potential to take a share of overtime.

Misconception Two: Bitcoin is too volatile to be of any value

Critics often point out that bitcoin's volatility makes it a poor investment option, but this argument ignores a few crucial facts about why bitcoin is experiencing such volatility.

First, bitcoin's volatility is a hot topic of debate and has caused some to criticise the asset for its sharp price swings. We believe this is a narrow view of volatility as volatility measures an asset's price movement, not just its declines. Those with the fortitude to hold onto bitcoin through its fluctuations have been richly rewarded. Take assets A and B, for example. Asset A increases on average by 10% per year with a deviation of 15%, while asset B moves by 5% per year with a deviation of 10%. Although asset B has lower volatility than asset A, asset A outperforms asset B in the long run. You must be willing to stomach the volatility to reap the rewards of bitcoin's price movements. Moreover, the USD may be less volatile day to day. However, if you have held the currency over the last 100 years, you've lost 96% of your purchasing power.

Second, volatility is a natural phenomenon when it comes to technological adoption. When a new technology is introduced, there is bound to be uncertainty and speculation about its potential, which leads to price fluctuations. Artificial intelligence (AI) is a prime example of a highly volatile sector. From [2021 to 2022](https://www.precedenceresearch.com/artificial-intelligence-market#:~:text=The%20global%20artificial%20intelligence%20(AI,USD%2051%20billion%20in%202021.), the total value of AI increased from $51 billion to $119 billion. However, despite its volatility, the benefits of investing in AI cannot be ignored. From self-driving cars to personalised healthcare, the potential applications of AI are immense. So, if you're interested in AI, you wouldn't want to miss out on the opportunities it presents just because of its volatility.

Furthermore, bitcoin's volatility is not unique. Traditional financial markets also experience fluctuations in asset prices, such as the stock market, commodities market, and even currencies. In fact, the volatility of bitcoin is arguably less severe than many other assets.

Lastly, the argument that bitcoin is excessively volatile fails to consider a significant aspect: its valuation is currently tied to fiat currency. The observed fluctuations in bitcoin's value are primarily driven by the inherent instability of the underlying unit of measurement, such as the dollar or other currencies. As Lawrence White aptly points out in his book Better Money, these price swings largely result from people seeking a hedge against inflation. Put differently, in our fractional reserve system governed by central banks, those in positions of power have the capacity to alter the supply of money in circulation. As a result, when they perform monetary policy, such as quantitative easing, asset prices rise, and when they tighten, prices fall. This whipsaw effect is a byproduct of a centralised monetary system, creating uncertainty and instability in financial markets. Consequently, assessing bitcoin's volatility based on its behaviour under a fiat standard is misleading. In essence, it merely highlights the inherent volatility of fiat currencies.

In contrast, Bitcoin operates on a decentralised network, where supply is fixed and cannot be manipulated by a central authority. While this means there may be short-term volatility, the scarcity and predictability of bitcoin's supply will most likely reduce volatility and increase stability in the long run.

To illustrate this:

In 2018, two independent studies conducted by Charles Schwab and Grayscale Investments revealed that bitcoin's volatility had substantially decreased between 2011 and 2013.
A report by Bitwise Asset Management in 2019 found that bitcoin's volatility had decreased significantly since 2014 and was now comparable to other traditional assets such as stocks.
A study published by Coin Metrics in 2020 found that bitcoin's volatility had decreased significantly over the past two years.

With this in mind, it is important to view bitcoin's volatility in the context of the broader economic system and not simply dismiss it as a flaw. Bitcoin's potential as a store of value and means of exchange should not be discounted based on short-term price fluctuations.

Misconception Three: Bitcoin is worthless as it is not backed by anything

Bitcoin is often dismissed for not being backed by anything of value, like gold or government currency. The idea that, given bitcoin is not backed by anything tangible, it must be worthless is a fallacy.

Value is subjective and is in the eye of the beholder. Something is valuable because people believe it to be so. Take the example of art. A painting is just canvas and paint, yet some pieces are worth millions of dollars. Why? Because enough people value them that highly. Regardless of what others think, paintings offer value to the owner, which is why they purchased them.

The same goes for bitcoin. People value it because it is a decentralised currency that is not controlled by any government or bank. It is scarce, with a limited supply, and is secure due to the technology behind it. Some people may not see these characteristics as offering value, and that is ok. But that doesn't mean that it is worthless.

Price is a reflection of what people are willing to pay for something. If bitcoin were truly worthless, as it was not backed by anything, then it would be trading at $0, as nobody would be willing to exchange their hard-earned money for it.

Furthermore, the idea that currency must be backed by something of value is inaccurate. Fiat currencies, like the US dollar, are not backed by gold or anything tangible. Instead, their value is based on trust in the government that issues them and the belief that they can be exchanged for goods and services. In the case of bitcoin, its value is based on trust in the technology that underpins it and the belief that it can be used to store value or exchange goods and services.

Ultimately, the idea that something must be backed by something else of value to be valuable is a misnomer. Value is subjective and based on people's experiences and beliefs. Just because one person deems something worthless doesn't mean everyone does, and vice versa.

Misconception Four: Bitcoin’s technology is already obsolete

Let's now dive into the repeated argument that Bitcoin is obsolete, breaking down why this could not be further from the truth.

First, in the world of cryptocurrencies, there is this idea called the blockchain trilemma. In essence, there are three primary characteristics cryptocurrencies tend to focus on:

Scalability
Security
Decentralisation

Without diving into the weeds, in the realm of cryptocurrencies, the trilemma emerges when a cryptocurrency must determine its trajectory and values. The cryptocurrency can only prioritise two out of the three aforementioned characteristics, forcing difficult decisions and trade-offs to be made.

Bitcoin chooses to prioritise decentralisation and security over scalability. Nevertheless, this scalability is still achieved. It just does so through alternative means (Discussed in the next misconception). Other cryptocurrencies, however, often prioritise scalability, but in doing so, they sacrifice decentralisation, making them vulnerable to attack or no different from fiat currency or a security.

Secondly, Bitcoin is built on consensus, which means no matter who you are or where you live in the world, by running a piece of software, you can have a say in the direction of Bitcoin. This means that as the world advances, Bitcoin can adapt to its changing environment. This is illustrated by the many upgrades that have been made to Bitcoin over the years, such as SegWit, which improved its scalability, and the Lightning Network, which enables faster and cheaper transactions.

Lastly, while there are thousands of other cryptocurrencies that offer different benefits, Bitcoin is not trying to be all things to all people. Instead, it is trying to do one thing incredibly well: to be a decentralised, trustless, and permissionless currency. And... it does this better than anyone else, as evidenced by its market cap, which is multiples of any other cryptocurrency.

However, it should be noted that the landscape of "cryptocurrency" is often packed with buzzwords, many of which are rooted in ideas proposed, tested, and subsequently abandoned by OG cryptographers and Bitcoin developers. An array of examples highlights this trend: The now-hyped zero-knowledge (ZK) technology found its genesis in discussions by Satoshi himself in 2010 and Gregory Maxwell in 2013. Concepts like confidential transactions (CT) and bulletproof, now integral to Monero and Grin, were crafted and realised on two Bitcoin sidechains, Elements and Liquid. The notion of "braiding"—interweaving or linking multiple blockchain chains together to achieve certain benefits or functionalities—was originally proposed by Bitcoin developers as a potential solution to certain scalability and interoperability challenges and is now employed by Kaspa, Byteball, Nano, and Hedera. The origin of much "NFT" innovation traces back to Bitcoin's pioneering efforts in 2013/14/15. Even the widely-marketed "Proof of Stake," which gained prominence through Peercoin, Bitshares, NXT, and Ethereum, is a revived concept derived from Wei Dai's second b-money protocol, originally conceived in 1998—though Satoshi ultimately dismissed it, favouring Proof of Work. While delving into every detail isn't necessary, it's evident that the "innovation" underpinning many alternative coins finds its roots in the evolution of Bitcoin itself.

Therefore, once again, the argument that Bitcoin is obsolete is unfounded. It may not be perfect for everyone, but it continues to evolve and improve.

Misconception Five: Bitcoin is too slow and expensive to be an effective medium of exchange

If you recall from Module Two Section Four, Bitcoin's blockchain is made up of blocks, each with a maximum size of around 1mb. Due to the limited block size, Bitcoin's base layer has an upper limit of processing around seven transactions per second (tps), much lower than networks like Visa or Mastercard, which transact at 1,700 tps. Thus Bitcoin is often said to be too slow to ever function as a viable medium of exchange.

However, it is vital to point out that Bitcoin is not trying to compete with Visa or Mastercard. Instead, it is more similar to layer one, capable of processing high-value transactions but a fraction of the speed and cost of traditional layer one methods while also being trustless, permissionless and offering transactions with final settlement.

But Bitcoin also competes with layer two transaction methods, with technologies like Lightning built on top of layer one. Lightning allows for near-instant transactions with minimal fees, making microtransactions and small purchases possible. Since El Salvador has adopted Bitcoin as legal tender, the general populace has been using Lightning to transact with Bitcoin due to its unparalleled benefits, such as almost instantaneous transaction times and fees for a fraction of a cent. This makes it a perfect fit for small merchants and individuals.

Misconception Six: Bitcoin is mainly used for illegal activity

Despite the numerous studies debunking false claims, Bitcoin is still often criticised as being primarily used for illicit activity. Once again, this could not be further from the truth.

One study conducted by the ex-deputy director of the CIA found that "broad generalisations about the use of Bitcoin in illicit finance are significantly overstated." In fact, since 2016, less than 1% of Bitcoin's total transaction volume has been used for illicit activity. By comparison, "some put the underground economy at 11% to 12% of US gross domestic product," of which the majority is facilitated using the US dollar.

And according to a report by Chainalysis in 2020, illicit activity only accounts for about [0.34%](https://www.europol.europa.eu/cms/sites/default/files/documents/Europol Spotlight - Cryptocurrencies - Tracing the evolution of criminal finances.pdf) of all Bitcoin transactions.

However, even with this evidence, misleading statements continue to be made by those in power, such as US Treasury Secretary Janet Yellen claiming, "Cryptocurrencies have been used to launder the profits of online drug traffickers; they've been a tool to finance terrorism."

Although countless studies disprove such false claims, it is clear that certain individuals have an agenda and are determined to construct negative and unfactual narratives around Bitcoin. The reality is that Bitcoin has the potential to bring about significant positive change in the world, from providing access to financial services for the unbanked to reducing transaction costs and increasing financial freedom.

In light of this, while there is no denying that illicit activity does occur within the world of Bitcoin, the evidence shows that it is a fallacy to believe that it is the primary use case. In fact, the percentage of Bitcoin transactions used for illicit purposes is significantly lower than that of traditional finance.

However, it’s important not to paint all illegal behaviour with the same brush stroke. Certain activities deemed "illicit" in one jurisdiction may be seen as a fundamental right in another. For example:

The practice of non-Islamic religions in Saudi Arabia,
Same-sex marriage in countries like Russia and Iran,
Or access to education for girls in Pakistan

...are deemed illegal in their respective jurisdictions. This underscores that what is deemed illegal is not black or white. There's a complex relationship between legal definitions and the diverse values upheld across different regions.

Misconception Seven: Anyone can duplicate the Bitcoin code, making it worthless

The argument that Bitcoin's code can be easily copied and, therefore, is worthless misses a crucial aspect of what gives bitcoin its value. While it is true that the code for Bitcoin is open source and can be copied, the value of bitcoin is not solely derived from the utility it offers.

One of the most important aspects of Bitcoin is its network. Bitcoin has been around since 2009 and has built up a significant user base over time. This user base includes individuals, businesses and nations that have invested in bitcoin and use it as a store of value or a means of exchange.

This network creates a powerful incentive for people to continue using Bitcoin. Even if a new token were created with the same functionality as Bitcoin, it wouldn’t have the same level of trust and adoption. This is because it would lack the established network of users and the history of transactions.

Simply put, just like how you cannot spin up a brand new Facebook tomorrow and expect it to be as valuable as the original Facebook, a new token cannot simply replicate Bitcoin's network overnight. The value of bitcoin is not just in its code but in the trust and adoption that it has built up over time.

In summary, while Bitcoin's code may be open source and can be copied, its value is derived from its network of users and the trust and adoption it has built up over time. A new token with the same functionality as Bitcoin would not have the same level of trust and adoption and, therefore, would not be a viable substitute for Bitcoin.

Misconception Eight: Bitcoin consumes too much energy

Bitcoin frequently becomes the target of smear campaigns, claiming it consumes more energy than small countries or will boil the oceans. However, these critics conveniently overlook comparable examples from other energy-consuming endeavours to provide a reference.

It is also worth noting that the criticisms regarding Bitcoin's energy usage often originate from individuals in privileged and developed societies. These individuals typically have access to banking facilities, use clothes dryers, rely on air conditioners for heating or cooling, decorate their homes with Christmas lights, and frequently engage in overseas or long-distance holidays. All of these endeavours consume energy. With this in mind, we want to discuss three points:

The Subjectivity of Value: Why there is no such thing as "too much" energy consumption. The amount of energy consumed by a particular activity or industry reflects the value people attribute to it. If something requires energy to operate, it is because there is a demand and perceived benefit associated with it.
Direction Energy Monetisation: We have a method to monetise energy directly for the first time in history.
Fair Comparisons: By comparing Bitcoin's energy usage to that of other sectors, we can gain a more balanced perspective and assess the validity of the claims made against it.

But first, let's answer the glaring question: Why does Bitcoin consume energy?

Similar to how energy is consumed in mining physical gold, Bitcoin miners consume energy in their pursuit of acquiring bitcoin. This requirement of real-world energy anchors an otherwise intangible digital asset to the physical world. Moreover, with the vast network of miners globally expending energy to secure the Bitcoin network, energy consumption to obtain bitcoin serves as a powerful defence mechanism against centralisation and undue manipulation. For this reason, it is exceedingly difficult for centralised entities to co-opt the network or manipulate the rules in their favour, as they would have to outcompete the countless globally distributed miners.

In light of this, let's take a look at the three discussion points above.

The Subjectivity of Value

At some point, you may have come across the argument that bitcoin has no intrinsic value, leading to questions about why it should be allowed to consume energy.

As discussed in misconception three, intrinsic value is subjective and dependent on individual circumstances and needs. For example, imagine yourself in a scorching desert, and someone offers you a thick down jacket. It would be useless. Now, imagine you're in the freezing cold Arctic. Suddenly, that jacket becomes immensely valuable. This illustrates that value is not inherent in an object but rather determined by the specific context, conditions, and utility the object provides to an individual in meeting their needs. However, subjectivity doesn't just extend to value. It extends to the consumption of energy as well. If something requires energy to operate, it clearly indicates that people find value in it, as they are willing to dedicate their time, resources, and energy towards it.

Every day, we witness countless examples of energy consumption arising from individuals' perceived value of certain activities or industries. Energy consumption is intricately tied to value creation, from the use of appliances in our homes to Bitcoin mining to the energy required to power the vast infrastructure that drives our economy.

Consider the advancements in technology, transportation, and entertainment that have emerged over time. These innovations often demand significant amounts of energy, yet they have fundamentally transformed our lives and brought immense value. Bitcoin is no different. Whether it is the convenience of modern transportation, a peer-to-peer digital currency, or the enjoyment derived from various forms of entertainment, these experiences and benefits are made possible by energy consumption.

With this in mind, it is important to recognise that the perception of value varies among individuals and communities. What one person may deem as a worthwhile energy use, another might view as excessive or unnecessary. However, this subjectivity should not diminish the recognition that energy consumption is intrinsically linked to the value people attribute to certain endeavours.

For instance, many individuals deem Bitcoin a worthwhile use of energy due to its ability to provide a decentralised, trustless, and permissionless means of transacting without intermediaries. While some people in developed countries may not fully appreciate this value proposition, it holds tremendous significance for those living in countries where government control is restrictive and inflation is rampant. In such circumstances, a currency like Bitcoin offers immense value, leading to people in these situations being willing to dedicate their energy and resources to support its operation.

Direct Monetisation of Energy

In the past, power plants, solar farms, hydro dams, and similar entities depended on selling their energy to the energy grid, individuals, or businesses to drive revenue. However, this reliance on local buyers often led to the wastage of unused energy when there were not enough buyers. Consequently, this scenario creates what is commonly referred to as stranded energy, where energy is produced but has no alternative purpose or buyer and is ultimately wasted. One might suggest storing the excess energy in batteries, but unfortunately, the limitations of battery technology make this an impractical solution.

And this is where Bitcoin comes in. For the first time in history, Bitcoin enables the direct monetisation of energy.

Energy producers can now redirect stranded energy towards Bitcoin mining, allowing them to earn Bitcoin from unused energy. This innovative approach not only significantly reduces wasted energy but also opens up an additional revenue stream that was previously inaccessible. Conversely, this newfound revenue helps lower the overall energy cost for everyone else, as in the traditional energy market, the price of energy includes the cost of wasted stranded energy. Why? By utilizing Bitcoin mining to monetise this previously unusable energy, energy producers can offset their costs and pass on the benefits to consumers, reducing energy prices.

Expanding on this concept, our energy grid is designed to operate with excess capacity, typically utilising only 40-60% of the energy it can produce at any given moment. This precautionary measure allows the grid to quickly accommodate unexpected surges in energy demand during events such as extreme weather conditions, like heatwaves or cold spells, when people intensify their use of air conditioning or heating systems. Since energy producers cannot instantaneously increase their output to match the sudden rise in demand, generating a surplus of energy becomes necessary, introducing excess capital costs and the potential for wasted energy.

And this wastage doesn't look to be improving anytime soon. As the strength of the wind varies, and solar intensity diminishes with cloud cover, wind energy is around 15-30% efficient at best, while solar energy comes in at approximately 16-24% efficient. Given our plans to transition towards 100% reliance on renewable energy sources, it becomes necessary to have an energy capacity of at least three times the maximum demand of the grid. This surplus capacity is required to ensure that the grid remains stable in the event of supply interruptions, minimising the threat of blackouts. However, that also means a large portion of our energy production will be stranded at any time! This energy has no other use. There is no one willing to buy it.

However, now energy producers have a way of capitalising on this stranded energy that would otherwise go to waste. By monetising the surplus energy through Bitcoin mining, energy producers can optimise their operations, benefit financially, and ultimately reduce costs for everyone on the grid.

Lastly, Bitcoin miners are motivated to seek out inexpensive energy sources since their profits depend on the cost of energy. Consequently, they actively look for stranded energy or other forms of energy that would otherwise go unused. One notable example is flare gas, which is released when petroleum companies extract oil from the ground. Flare gas is a byproduct of this process and is typically burned off due to the high cost associated with capturing it. This practice, known as flaring, not only results in wasted energy but also releases methane and various other gases into the atmosphere.

Figure: Flare Gas

However, with Bitcoin, engineers have devised a way to utilise this otherwise wasted natural gas by converting it into energy to power Bitcoin miners. This breakthrough not only provides an additional revenue stream for these companies but also has significant environmental benefits. By harnessing flare gas to generate electricity for Bitcoin mining, these companies can reduce emissions which would otherwise pollute the air we breathe. In essence, Bitcoin is carbon-negative in this scenario by offering a means to reduce emissions and make productive use of previously discarded energy sources.

All in all, given that Bitcoin miners are incentivised to seek out cost-effective energy sources, often favouring renewable energy, Bitcoin boasts one of the most sustainable energy mixes among industries and even countries. So, the next time someone raises concerns about Bitcoin's environmental footprint, you can confidently counter with the fact that Bitcoin is at the forefront of sustainable energy practices.

And lastly…

Fair Comparisons

We want to start by saying: Everything consumes energy, whether we realise it or not. Even a simple act, like running with your dog, necessitates fueling yourself and your furry companion. Both you and your dog are energy consumers.

Now our intention is not to criticise other industries for their energy consumption because, as discussed above, energy usage signifies the value people find in the services or products provided. However, it is essential to put Bitcoin's energy usage into perspective. Consider the following comparisons:

Washing machines consume 18% more energy than Bitcoin.
Gold mining and jewellery production consumes ten times more energy than Bitcoin.
Sea transportation consumes over 51 times more energy than Bitcoin.
The financial and insurance sector consumes a staggering 62 times more energy than Bitcoin.
And remarkably, the building sector consumes a staggering 457 times more energy than Bitcoin.

By examining these comparative examples, it becomes evident that before passing judgment on Bitcoin's energy consumption, we must consider the energy usage of other industries. This perspective allows for a more comprehensive understanding of the broader energy landscape.

Furthermore, when we consider the extensive benefits that Bitcoin provides, including:

Banking access for the unbanked population
Global peer-to-peer transactions without intermediaries
Cost-effective remittance options for individuals to send money to their families
A trustless and permissionless digital currency system
A means for those living under authoritarian regimes to save and transport value securely
Direct monetisation of stranded energy

We gain a deeper understanding of why people not only find immense value in Bitcoin but are also willing to direct their energy towards its operation.

To end, we hope these Bitcoin misconceptions have given you a deeper understanding of Bitcoin beyond the surface-level criticisms it often receives. Upon closer examination, it should now be evident that many of these critiques prove to be baseless. With this in mind, it's time to shift the focus away from misguided portrayals of Bitcoin and towards a more comprehensive understanding of the broader financial system. By doing so, we can work towards creating a more fair and equitable system that benefits everyone, not just those in power.

Let’s now turn our attention to the common misconceptions surrounding stablecoins…

Stablecoin Misconceptions

Most stablecoins are not fully backed by reserves
Even the most stable of stablecoins depeg
Given most stablecoins are centralised, the issuer can freeze your funds
You'll lose your funds if the underlying chain goes down
Both Bitcoin and stablecoins benefit the rich in developing countries

Misconception One: Most stablecoins are not fully backed by reserves

When understanding stablecoins, it is essential to recognise that each stablecoin operates under unique principles and frameworks. Some stablecoin projects exhibit exceptional diligence and transparency by providing detailed information about their reserves and regularly releasing attestations verifying them.

For instance, Tether strongly supports transparency visible by their attestations, which can be accessed to gain insight into their reserve backing here. These attestations serve as a testament to their commitment to putting the customer first.

However, this is not the case for all stablecoins, with many not offering the same level of transparency. Therefore, we cannot stress the importance of conducting thorough research before entrusting significant wealth to any particular stablecoin. Furthermore, there is a level of trust that the user must place with the stablecoin issuer, regardless of the level of transparency.

Another common criticism is that stablecoins are often not fully backed by cash but rather "cash and cash equivalents." This is the technical term for cash and cash-like reserves that can easily be converted to cash. However, it is important to consider two points:

First, stablecoin issuers often invest in cash equivalents rather than holding cash, as cash can significantly impact the stablecoin issuer's balance sheet. With current banking regulations, any balance sheet assets, such as cash, are subject to potential loss in the event of bankruptcy, and the Federal Deposit Insurance Corporation (FDIC) only provides insurance coverage for up to $250,000 USD, with amounts exceeding this limit at risk. To mitigate this exposure, stablecoins aiming to safeguard users against unforeseen events often invest in government-issued treasury bills. By investing in assets like treasuries, not only do they generate a yield, these assets can be deemed off-balance sheet securities. As a result, stablecoin issuers can protect their funds in the event of bank bankruptcy, as these securities could be returned to the customer. A compelling illustration of this occurred in February/March 2023, involving Silicon Valley Bank (SVB) and Circle, the company behind the stablecoin USDC. At that time, Circle had a substantial $3.3 billion in cash deposited with SVB. And then, SVB went bankrupt. To avert a financial disaster, the FDIC intervened to rescue Circle and other affected companies by covering the missing funds. However, this is not the standard course of action. This unprecedented event marked the first time in history such a situation had unfolded. Without the FDIC's intervention, Circle might have faced bankruptcy as well.

Second, we often criticise stablecoin issuers for investing in non-cash assets, yet our existing banking system operates on a fractional reserve basis. In simple terms, banks do not hold sufficient reserves to meet the withdrawal demands of their customers. If a significant portion of our national population were to withdraw their deposits, the banking sector would quickly collapse. In fact, since 2020, the reserve requirement in the United States has been set at zero, meaning that banks are not obligated to retain ANY customer deposits.

We want to be clear. This observation does not imply that we should disregard concerns about stablecoins substituting cash reserves for assets that could depreciate in value, potentially destabilising the stablecoin. Instead, we should acknowledge the double standards between traditional and modern cryptographic finance.

All in all, while misconceptions about stablecoins exist, and rightly so in many instances, it is essential to recognise that each stablecoin operates uniquely, with varying degrees of transparency and diligence. By conducting thorough research into whichever stablecoin you decide to store value in, you can mitigate many of the common pitfalls associated with cryptocurrencies.

Misconception Two: Even the most stable of stablecoins depeg

When it comes to the misconception that even the most stable of stablecoins depeg, it is important to differentiate between the primary and secondary markets.

The primary market exists between the stablecoin issuer, i.e. Tether, and the primary exchanges that have the ability to redeem the underlying asset of value, such as USD, or issue stablecoins to maintain price stability. These primary market transactions ensure that the stablecoin remains closely pegged to its intended value.

On the other hand, the secondary market is between the customers and the exchanges. This is where individuals can buy and sell stablecoins, whether trading, investing or whatever else their heart desires.

A depeg occurs when a stablecoin no longer has the necessary reserves to meet the withdrawal demands of its holders or in the event of a hack compromising the stablecoin. However, it is important to note that most short-term price volatility experienced by stablecoins is not indicative of a depeg. Instead, it is often a result of liquidity issues.

Let us explain. Suppose a smaller exchange lacks the capability to redeem the underlying asset of value, and there is strong selling pressure from people seeking to withdraw the underlying asset of value backing the stablecoin. In that case, the stablecoin's price may temporarily drop below its ideal pegged price. This temporary drift from the peg is a short-term occurrence and should normalise once the exchange obtains the necessary underlying assets to meet its customer's needs. This temporary price volatility does not necessarily indicate that the stablecoin has failed and is collapsing. Instead, it reflects low liquidity levels impacting users' ability to withdraw funds in a timely manner.

On the flip side, it is also possible to observe stablecoin trading above their pegged price. This situation arises when the demand for stablecoins surpasses an exchange's capacity to meet customer demands. Typically, this phenomenon occurs on smaller exchanges that lack a direct link to the stablecoin and when the underlying asset holds significant value, prompting individuals to pay a premium to acquire it. For example, consider a scenario where individuals residing in an authoritarian country experiencing rampant inflation seek refuge in stablecoins like USDt. In such cases, people may be willing to pay a premium to obtain dollars in the form of USDt. This willingness stems from the understanding that failing to do so would expose them to a greater decline in their purchasing power caused by the inflationary environment.

In light of this, price volatility is out of the hands of the stablecoin issuers, such as Tether, as they do not interface directly with the customer. Instead, customers obtain USDt through exchanges. They are, therefore, reliant on the exchange to maintain adequate stablecoin/underlying asset liquidity to meet the needs of their customers.

In summary, next time a stablecoin trades above or below its intended price, be aware of the distinction between short-term price volatility caused by liquidity issues and a genuine depegging event.

Misconception Three: Given most stablecoins are centralised, the issuer can freeze your funds

In addressing the misconception that stablecoins can freeze your funds due to their centralised nature, it is important to emphasise the distinction between centralised and decentralised entities, each with its own advantages and disadvantages. While we strongly advocate for decentralised assets like Bitcoin, this does not mean centralised stablecoins lack value or benefits.

One of the primary advantages of centralisation is the ability to intervene when it is in the best interest of users and the overall stability of the system. Although it is true, stablecoins issuers have the potential to freeze funds. In essentially all instances, this is not used as a malicious attack on the stablecoin holder. Instead, it is in conjunction with law enforcement to protect consumers. A notable example is the case of the FTX exchange collapse. In collaboration with law enforcement, Tether froze $46 million worth of USDt to protect consumer funds.

Another instance demonstrating the benefits of centralised intervention occurred after the KuCoin hack in September 2020. Tether froze approximately $35 million worth of USDt to prevent hackers from profiting from their illicit activities. These examples highlight how centralised stablecoins, in certain scenarios, can swiftly respond to malicious actors and safeguard the interests of their users.

With this in mind, while we prioritise bitcoin for long-term savings due to the absence of intermediaries or individuals who can co-opt the network, centralised stablecoins still hold several benefits, i.e. while the centralised nature of stablecoins allows for the potential freezing of funds, this trait can be a valuable tool in combating illicit activities and protecting users.

Misconception Four: You'll lose your funds if the underlying chain goes down

One of the common misconceptions about stablecoins is that you'll lose your funds if the underlying chain of a stablecoin goes down. We, therefore, feel it is important to explain how stablecoins operate on their transport layer, such as TRON, Ethereum, and Algorand, among others. While it may initially seem concerning to lose access to your stablecoins when the underlying chain faces issues, you'll be happy to know there are measures in place to safeguard your funds.

Take, for example, USDt. Many fall into the trap of thinking the USD backing USDt sits on the transport layer. In reality, the USD is held in reserves by Tether and not directly by the underlying chain. Therefore, if the chain on which you hold USDt experiences a disruption, it does not mean the underlying USD reserves are lost. Instead, one of two scenarios is likely to unfold:

In most instances, disruptions in the underlying chain are temporary hiccups, and the chain will resume functioning shortly. These interruptions are often resolved, allowing users to regain access to their stablecoins.
In more significant cases, such as a major hack or chain failure, Tether can take remedial action. They may establish a staging website for USDt holders of the non-functioning chain. Through this website, users can then prove ownership of their USDt tokens using their private keys. Once ownership is confirmed, Tether can burn the non-functioning USDt tokens held by users and reissue them on a functioning chain. These reissued USDt tokens are then sent to the users, ensuring the continuity of their funds.

With this in mind, there are measures in place that even if the underlying chain of a stablecoin encounters difficulties, stablecoin issuers have steps they can take so you can recover your funds.

In summary, while it is natural to have concerns about losing access to your funds if the underlying chain of a stablecoin goes down, it is important to recognise the contingency plans and processes established by stablecoin issuers.

Before moving on, we want to highlight, once again, that every stablecoin operates differently. Therefore, it is imperative that you research any stablecoin you intend to use to familiarise yourself with the safety measures implemented to safeguard customer funds.

Conclusion

To end... Remember, Bitcoin and stablecoins inherently challenge the established power structures and authority of governments, which naturally invites pushback. Much of this resistance often arises from the fear of disrupting the existing financial system and questioning governments' control over currency and monetary policies. That said, not all of this pushback is grounded in fact. It is, therefore, imperative to approach these criticisms with a critical mindset.

By objectively assessing any pushback you encounter, you can better navigate the sea of baseless criticisms. Take the initiative to educate yourself on the intricacies of Bitcoin and stablecoins, delve into their underlying technology, and further explore their potential for financial innovation and empowerment.

Ultimately, the future of decentralised finance rests with those willing to venture beyond the confines of convention, challenge preconceived notions, and evaluate information objectively. Strive to make informed decisions about Bitcoin and stablecoins based on accurate knowledge and a balanced understanding of their capabilities and limitations.